Question

Helping Hand is a small, rapidly growing wholesaler of consumer electronic products. The company's main product lines are small kitchen appliances and power tools. The marketing manager has recently completed a sales forecast. She believes the company's sales will increase by 2 percent each month over the previous month's sales from December 2019 through March 2020. Then sales are expected to remain constant for several months. Helping Hand's projected balance sheet as of December 31, 2019 is as follows: Cash 140,000 Accounts receivable 202,851 Marketable securities 55,000 Inventory 35,894 Buildings and equipment (net of accumulated depreciation) 610,000 Total assets $ 1,043,745 $ 124,488 7,038 5,000 Accounts payable Sales commissions payable Bond interest payable Property taxes payable Bonds payable (3%, due in 2023) Common stock Retained earnings Total liabilities and stockholders' equity 500,000 250,000 157,219 1,043,745 $

1. 1) Projected sales for November 2019 are $230,000. Credit sales are typically 85% of total sales. Helping Hand’s credit experience indicates that 12% of credit sales are collected during the month of sale, 74% in the month following the sale, and 14% in the second month following the sale. Experience shows the remaining credit sales are uncollectible.

2. 2) Helping Hand’s cost of goods sold generally runs at 60% of sales. Inventory is purchased on account and 12% of each month’s purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the company attempts to have inventory on hand at the end of each month equal to 25% of the next month’s projected cost of goods sold.

3. 3) The controller has estimated that Helping Hand’s other monthly expenses will be as follows:

Sales salaries $30,000
Advertising and promotion $6,000

Administrative salaries $11,000

Depreciation $8,000
Interest on bonds $1,250

Property taxes $4,000

In addition, sales commissions run at the rate of 3.0 percent of sales. Sales commissions are paid in the month following the month of sale.

4. 4) The company president has indicated that the company should invest $200,000 in an automated inventory-handling system to control the movement of inventory in the company’s warehouse just after the new year begins. The president would like to purchase the equipment primarily from the company’s cash and marketable securities. However, the president believes the company should have a minimum cash balance of $20,000 at the end of each month. If necessary, the remainder of the equipment purchase may be financed using short-term credit from a local bank. The minimum lending period for such a loan is three months (this means the earliest the loan can be paid off is March 31st). The current short-term interest rates are 6 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the entire amount required for the quarter must be borrowed on January 1st and must be in a $1,000 increment. The loan is a short term loan and the president has decided it should be paid off at the end of the first quarter if possible. If the entire amount cannot be repaid at March 31st, any partial payment will be paid at the end of the first quarter and in a $1,000 increment.

Answer 1

Jan Feb Mar Helping Hand Sales Budget Reg 1 Total sales Cash sales Sales on account Nov 230,000 34,500 195,500 Dec 234,600 35,190 199,410 Jan 239,292 35,894 203,398 23600 239,299 Feb Feb 244,078 36,612 207,466 Mar 248,959 37,344 211,615 Quarter 732,329 109,849 622,480 Calculation Dec =230,000*(1+2%) =234,600*(1+2%) Total sales*15% =Total sales *85% 109,500 Calculation Jan Feb Mar Cash receipts budget Req2 Cash sales Cash collections from credit sales during current month Cash collections from credit sales during preceding month Cash collections from credit sales during 2nd preceding month Total cash recipts Jan 35,894 24,408 147,563 27,370 235,235 Feb Mar Q uarter 36,612 37,344 109,849 24,896 25,394 74,698 150,515 153,525 451,603 27,917 28,476 83,763 239,940 244,738 719,913 =203,398*12% =199,410 * 74% =195,500 * 14% =207,466*14% =203,398*74% =199,410 * 14% =211,615*14% =207,466*74% =203,398*14% Jan Feb Feb Mar Purchase budget Req3 Budgeted COGS Add Desired Ending inventory Total Needs Less Beginning inventory Required Purchases Dec Jan Total sales*60% =143,575*25% =146,447*25% =149,376*25% =149,376*25% Dec 140,760 35,894 176,654 35,190 141,464 143,575 36,612 180,187 35,894 144,293 Mar 146,447 149,376 37,344 37,344 183,791 186,720 36,612 37,344 147,179 149,376 Quarter 439,398 3 7,344 476,741 35,894 440,848 =140,760*25% End Inv of Dec End Inv of Jan End Inv of Feb Jan Feb MarQuarter Jan Feb Mar 17,315 124,488 141,803 17,661 126,978 144,639 17,925 129,517 147,443 52,902 380,984 433,885 =144,293*12% =141,464*(1-12%) =147,179*12% =144,293*(1-12%) =149,376*12% =147,179*(1-12%) Cash disbursements budget Req4 Inventory Purchases Cash payments for purchases during current month Cash payments for purchases during preceding month Total cash payments for inventory purchases Other expenses Sales salaries Advertising & promotion Administrative salaries Interest on bonds Property taxes Sales comissions Total cash payments for Other expesnes Total cash disbursements 30,000 6,000 11,000 30,000 6,000 11,000 7,500 30,000 6,000 11,000 =1,250*6 90,000 18,000 33,000 7,500 12,000 21,539 182,039 615,924 -4,000*3 =244,078*3% =234,600*3% =239,292*3% 7,038 54,038 195,841 7,179 61,679 206,318 12,000 7,322 66,322 213,765

Cash budget Req5 Cash receipts Less cash disbursements Changes in cash balance due to operations Sale of marketable securities (1/2) Proceeds from bank loan (1/2) Purchase of equipment Repayment of bank loan (3/31) Interest on bank loan Payment of dividends Changes in cash balance during first quarter Cash balance, 1/1/x1 Cash balance, 3/31/X1 Jan Feb 235,235 239,940 195,841 206,318 39,394 33,622 55,000 25,000 (200,000) Mar Quarter Calculation 244,738 719,913 213,765 615,924 30,974 103,989 55,000 From balance sheet 25,000 From req 6 (200,000) (3,000) (3,000) (45) (45) =3,000*6%*3/12 (100,000) (100,000) (119,056) 140,000 20,944 Short term Borrowings Req 6 Projected cash balance as of Dec 31, 20x0 Less Minimum cash bal Cash available for equipment purchase Projected proceeds from sale of securities Cash avaialble Less cost of investment in equipment Required short-term borrowing Jan 140,000 (20,000) 120,000 55,000 175,000 (200,000) (25,000)

Quarter 732,329 439,398 292,932 =732,329*3% Income Statement Reqz Sales Cost of goods sold Gross Profit Selling and admin expenses Sales salaries Sales comissions Advertising & promotion Administrative salaries Depreciation Interest on bonds Property taxes Interest on bank loan Total selling and admin expenses Net Profit 90,000 21,970 18,000 33,000 24,000 3,750 12,000 375 =8,000*3 =1,250*3 =25,000*6%*3/12 203,095 89,837 Retained Earnings Req8 Retained Earnings, 12/31 Net Profit Less Dividends Retained Earnings, 3/31 157,219 89,837 (100,000) 147,056 Balance Sheet Req9 Assets Cash Accounts Receivable Inventory Building & Equipment, net Total Assets =(207,466*14%)+(211,615*(74%+14%)) 20,944 215,267 37,344 786,000 1,059,555 =610,000+200,000-8,000*3 131,451 7,469 1,250 =149,376*(1-12%) =248,959*3% Mar is payable Liabilities & Stockholders Equity Accounts Payable Sales comissions Payable Bond Interest Payable Property Taxes Payable Notes Interest Payable Notes Payable Bond Payable (3%; due in 2023) Common Stock Retained Earnings Total Liabilities & Stockholders Equity =375-45 =25,000-3,000 330 22,000 500,000 250,000 147,056 1,059,555